Uttarakhand Uttar Pradesh Delhi Haryana Rajasthan Maharashtra Punjab Madhya Pradesh India Karnataka Gujarat Kerela Chhattisgarh Jharkhand West Bengal Tamil Nadu Demonetization: A pause for sustainable growth of Indian Microfinance Industry Contact: Revati Kasture Chief General manager revati.kasture@careratings.com +91-22-67543407 Arindam Saha Deputy General Manager arindam.saha@careratings.com +91-33-40181631 Utkarsh Nopany Manager utkarsh.nopany@careratings.com +91-33-40181605 Rohan Burman Deputy Manager Rohan.burman@careratings.com +91-33-40181655 Mradul Mishra (Media Contact) mradul.mishra@careratings.com +91-22-6754 3515 Disclaimer: This report is prepared by Credit Analysis & Research Limited [CARE Ratings]. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report Indian Microfinance industry was growing at a very fast pace over the past 2-3 years period due to low penetration of formal banking system to majority of population. The industry has been considerably impacted from demonetization announcement on November 8, 2016 due to high dependency on cash transactions. The average collection efficiency of the Microfinance Industry has gone down from ~99% in October 2016 to 7 during Nov 7 Nov 25, 2016 mainly due to limited supply of new currency post demonetization, disruption in borrower s cash flow due to decline in demand and elongation of working capital cycle in few cash-based industries (such as textile, leather, handicraft, construction, etc.) and interference of local influential individuals with mala fide intention in selective states where the elections are approaching (such as local elections in Maharashtra, state election in Uttar Pradesh, Uttarakhand, Punjab). Cumulative Collection Efficiency of MFI Industry State-wise cum collection efficiency during Nov 9-Dec 31 100 95 90 85 80 75 70 65 60 February 08, 2017 I Research 99.00 Oct-16 Source: MFIN* 70.00 Nov 9 - Nov 25, 2016 82.00 82.00 82.00 Nov 9 - Nov 30, 2016 Nov 9 - Dec 10, 2016 Nov 9 - Dec 31, 2016 Source: MFIN* * Collection efficiency does not capture the financials of Bharat Financial Inclusion Ltd Post third-week of November 2016, the collection efficiency improved to more than 8 mainly on account of a) improvement in supply of new currency, b) constructive measures taken by the industry players in the form of frequently meeting with defaulting borrowers and educating the borrowers regarding deterioration in credit profile in case of non-payment of dues, and c) timely intervention by the industry self-regulatory body (MFIN and Sa-dhan) in the form of meeting with bureaucrats at state government/district level to reduce the intervention of local influential individuals and clear the 10 9 8 7 5 44% 55% 63% 66% 82% 82% 84% 86% 88% 9 91% 91% 94% 77% 78% 79%
misconception regarding the RBI notification issued on November 21, 2016 (wherein extension of 60 days timeline to repay the loan was misconstrued as loan waiver scheme). On December 28, 2016, RBI has further extended loan repayment period to 90 days for loans falling due from November 1, 2016 to December 31, 2016. Despite improvement in supply of new currency, the collection efficiency remained stable at around 82% in the second half of Dec 2016 due to the prioritization of cash flow for spending on necessities and impact of drought in Karnataka. Across the states, Uttarakhand, Uttar Pradesh, Delhi, Haryana, Rajasthan, Maharashtra, Punjab and Madhya Pradesh were the worst impacted states. The states in Southern and Eastern part of India have been the least affected and most of the states have witnessed collection efficiency of around or more than 9. To assess the near-term impact of demonetization on Indian Microfinance industry, CARE Ratings has done a survey with 32 MFI entities and 1 self-regulatory body (i.e. Sa-dhan). The MFI entities has been categorized as large MFIs (10 with gross loan portfolio >Rs.500 crore), mid-size MFIs (11 with GLP of Rs.100-500 crore) and small-size MFI (11 with GLP < Rs.100 crore). The participants in the survey include top level executives (MD, Director, CEO, CFO, etc). The combined AUM of the surveyed participants is estimated to be around Rs.34,000 crore, accounting for roughly 42% of total MFI industry. Survey participants universe SROs, 3% Large MFIs, Small MFIs, 33% Medium MFIs, 33% 2
The majority of the respondents are of the view that the demonetization would have a negative impact on the Indian MFI industry in the shortterm, but the magnitude of the impact would not be as severe as witnessed during the Andhra Pradesh crisis period mainly due to increased regulatory intervention of RBI, presence of credit bureaus and SROs and self-imposition of stricter code of conduct by MFIN on members than required by RBI. MFIN members account for ~8 of Indian Microfinance industry. Demonetization negative for MFI Industry in short-term....but impact is not as severe as seen during Andhra Pradesh crisis 45% 35% 25% 1 5% 42% 26% 19% 13% Negative Positive No Impact Can't Say No, 88% Yes, 12% Roughly 88% of the respondents expect collection rate to improve to more than 9 by March 2017, which indicates a sharp improvement in collection compared to the level achieved in the past two months (at around 8). Further, all the participants are of the view that the collection efficiency is expected to reach to the level of pre-demonetization period (i.e. ~99%) by June 2017. In contrast, PAR>30 days in Andhra Pradesh during AP crisis deteriorated from 0.4% in FY10 to 44% in FY11 and slowly improved to 42% in FY12 and 37% in FY13. Note that collection efficiency denotes amount collected from the customer over demand during the period whereas PAR>30 days represent the outstanding loan amount where the delay in collection is more than 30 days from the customer. 3
Majority believes CE to improve to >9 by Mar 2017 Collection efficiency to reach to normal level by June 17 PAR>30 days in Andhra Pradesh during AP crisis 53% 56% 50 44 42 40 37 44% 30 22% 25% 20 10 0.4 0 80-9 90-95% >95% March 2017 June 2017 FY10 FY11 FY12 FY13 Roughly 72% of the respondents will avail the relaxation benefit provided by RBI for asset classification norms by additional time period of 90 days for the loan instalments falling due from November 1, 2016 to December 31, 2016. Further, almost all the respondents are of the view that the projected growth of loan portfolio in FY18 has been revised down due to slowdown in disbursement after demonetization. Based on interaction with major MFI entities, CARE believes that the decline in AUM growth is mainly due to a) lower disbursement from the banks/nbfcs/fi s on the back of cautious stance on the sector, b) delay/disruption in equity raising plan of the company due to investors becoming cautious on the sector and c) higher focus of the MFI entities to improve collection efficiency and maintenance of higher liquidity cushion in the system. Majority MFIs to avail relaxation of asset classification norms by RBI No, 28% Projected growth in AUM for FY18 revised down on cautious stance 36% 36% 1 12% Yes, 72% - 1 1 - - > 4
Roughly 66% of the respondents are of the view that the demonetization would have structurally positive impact on the Indian MFI industry over the medium-term as most of the entities would gradually shift their business from cash mode to cashless mode. Majority players are structurally positive on the sector over the medium-term....mainly due to gradual shift to cashless mode of operation by Dec 2017 7 5 66% 45% 52% 1 19% 13% 3% 21% 12% Negative Positive No Impact Can't Say Cash Cashless < 5 Cashless > 5 Cashless > 8 CARE s opinion According to interaction with few major MFI entities, the collection efficiency is expected to improve in the month of January 2017 due to improved supply of new currency, general improvement in economic activity and important role played by SROs in creating awareness among the borrowers directly or indirectly through bureaucrats and sustained media engagements. While the industry expects collection efficiency to reach to normal level by June 2017, continued interference of local influential individuals with mala fide intention remains a major risk to the sector in the near-term. However, the collection efficiency is expected to reach to normal levels over the medium-term period due to increased credit disciple among the borrowers as a result of presence of credit bureaus. Demonetization has also given a sudden push to the MFI sector to move towards cashless mode of operation. While CARE believes that a good proportion of MFI transaction would continue to be dependent upon cash mode due to a) low penetration of banks/atm in rural areas, b) most of the borrowers are at the bottom of the pyramid (which are dealing only in cash) and c) low proportion of smartphone users in India (especially 5
women). However, the intention of most of the MFI s to shift the business to cashless mode would bring in greater transparency and enhance the risk management system over the medium-term perspective. Post-demonetization, most of the MFI entities are further strengthening the risk management system by balancing-check of overleveraging of the borrowers and disbursing funds on a more prudent basis. Further, MFIN is also putting in place an initiative where all the industry players have voluntarily agreed to cap the number to three lenders per borrower (as against only two NBFC-MFI per borrower but with no cap on other lenders) by increasing the universe from NBFC-MFIs to cover the entire industry (i.e. banks, SFBs, NBFCs, NBFC-MFIS, Section 8, Section 25, etc.). This would help in better management of overall indebtedness of the borrowers from the industry perspective. In the near-term, the profitability of the Indian MFI Industry is expected to be negatively impacted mainly due to a) reversal of income on account of NPA creation, b) increase in cost-to-income ratio on the back of lower income as a result of expected decline in loan portfolio per employee, and c) increase in provisioning expense due to deterioration in the asset quality. As a result, the credit profile of the entities with concentrated portfolio (especially in affected states), high leverage and weak asset liability management is expected to remain under pressure over the next 6-12 month period. CARE will continue to closely monitor the developments of the emerging scenario and take appropriate rating actions once more clarity emerges. CORPORATE OFFICE: CREDIT ANALYSIS & RESEARCH LIMITED Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai - 400 022. Tel: +91-22-6754 3456 I Fax: +91-22-6754 3457 I E-mail: care@careratings.com I www.careratings.com Follow us on /company/care Ratings /company/care Ratings 6